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Citadel is not front running trades. This isn't how PFOF works. People say this over and over again, but it just shows that they have little to no understanding

by smabie 6y ago

Citadel is not front running trades. This isn't how PFOF works. People say this over and over again, but it just shows that they have little to no understanding of how a market maker operates. Which is fine, everyone is uninformed about some things. Except if you know nothing about something, you shouldn't post naive statements that you claim as factual, when they are in fact not.

briefcomment 6y ago
You’re right that a lot of people say this. And not just random people, but people with large audiences, and people who presumably have some expertise. What is Robinhood’s relationship with Citadel then?
- tedunangst 6y ago
  Not sure what the founder of barstool sports actual experience is in this area. Or whoever else. Also, it's very easy to describe order flow in a disingenuous way (citadel sees the order before the market) that's technically true and will make people think it's front running. Did the experts say front running? Or did they say paid for orders and somebody else said front running?
  - briefcomment 6y ago
    Here's AOC discussing it https://www.msn.com/en-us/money/other/aoc-returns-to-twitch-tonight-to-speak-out-on-robinhood-and-gamestop/ar-BB1dbydg https://www.msn.com/en-us/money/other/aoc-returns-to-twitch-... And here's a Vice article about it. They don't mention front running, but the outcome sounds the same, in that the customers are not paying the best price for the stock, since the middle man pockets some. https://www.vice.com/en/article/qjpnz5/robinhoods-customers-are-hedge-funds-like-citadel-its-users-are-the-product https://www.vice.com/en/article/qjpnz5/robinhoods-customers-... Also, thread. Can't speak for the expertise of the author, but at least he links to several articles in the comments. https://twitter.com/toxic/status/1353890772135813121 https://twitter.com/toxic/status/1353890772135813121 This guy describes it as front running. https://mobile.twitter.com/anyaparampil/status/1355984104525869057 https://mobile.twitter.com/anyaparampil/status/1355984104525...
    - gruez 6y ago
      ...and here's a financial columnist (ie. an expert) writing about it: https://www.bloomberg.com/opinion/articles/2021-01-29/reddit-traders-on-robinhood-are-on-both-sides-of-gamestop https://www.bloomberg.com/opinion/articles/2021-01-29/reddit... >Market makers stand ready to buy or sell stock from or to customers; they try to buy for a bit less than they sell at, and pocket the spread. If you go out into the market and say “hey I’ll buy anyone’s stock for $10,” and a really smart hedge fund comes to you and sells you stock for $10, that’s probably bad. You’ve probably made a mistake. The hedge fund is selling you the stock for $10 because it knows it’s worth $8. This is called “adverse selection.” >More subtly, if a really big mutual fund comes to you and sells you stock for $10, that also may be bad. The mutual fund is probably selling lots of stock, because it’s so big; it sells you a little, then sells a little more, then a little more, until it pushes the price down to $8. The mutual fund isn’t necessarily smart, but by virtue of being big and doing big trades, it moves the price; if you are on the other side of its trades, you get run over. This is also a kind of adverse selection: You buy at $10 and are stuck selling at $8. Part of the spread that market makers earn in public markets—the difference between their buying and selling prices—compensates them for adverse selection, the risk of being run over by a counterparty who knows something they don’t. >Market makers, the textbook theory goes, would much rather trade with retail orders. Retail investors generally don’t know much, so if you buy stock from them you’re probably not making a mistake. And retail orders are generally small and uncorrelated: One investor buys a little, another comes along a moment later and sells a little, it’s all pretty random, and you’re not facing an avalanche of steady sell orders that push the price down. Trading with retail is so nice that market makers—wholesalers—will both give retail orders a tighter spread (pay more to buy their stock, charge less to sell stock to them) and pay their broker for the privilege of doing it.
      - briefcomment 6y ago
        That's fine if market makers stick to the rules. What do you make of some of what Citadel has done before? https://www.bloomberg.com/news/articles/2020-07-21/citadel-securities-fined-by-finra-for-trading-ahead-of-clients https://www.bloomberg.com/news/articles/2020-07-21/citadel-s... https://www.sec.gov/news/pressrelease/2017-11.html https://www.sec.gov/news/pressrelease/2017-11.html

by smabie 6y ago

briefcomment 6y ago

You’re right that a lot of people say this. And not just random people, but people with large audiences, and people who presumably have some expertise. What is Robinhood’s relationship with Citadel then?

tedunangst 6y ago
Not sure what the founder of barstool sports actual experience is in this area. Or whoever else. Also, it's very easy to describe order flow in a disingenuous way (citadel sees the order before the market) that's technically true and will make people think it's front running. Did the experts say front running? Or did they say paid for orders and somebody else said front running?
- briefcomment 6y ago
  Here's AOC discussing it https://www.msn.com/en-us/money/other/aoc-returns-to-twitch-tonight-to-speak-out-on-robinhood-and-gamestop/ar-BB1dbydg https://www.msn.com/en-us/money/other/aoc-returns-to-twitch-... And here's a Vice article about it. They don't mention front running, but the outcome sounds the same, in that the customers are not paying the best price for the stock, since the middle man pockets some. https://www.vice.com/en/article/qjpnz5/robinhoods-customers-are-hedge-funds-like-citadel-its-users-are-the-product https://www.vice.com/en/article/qjpnz5/robinhoods-customers-... Also, thread. Can't speak for the expertise of the author, but at least he links to several articles in the comments. https://twitter.com/toxic/status/1353890772135813121 https://twitter.com/toxic/status/1353890772135813121 This guy describes it as front running. https://mobile.twitter.com/anyaparampil/status/1355984104525869057 https://mobile.twitter.com/anyaparampil/status/1355984104525...
  - gruez 6y ago
    ...and here's a financial columnist (ie. an expert) writing about it: https://www.bloomberg.com/opinion/articles/2021-01-29/reddit-traders-on-robinhood-are-on-both-sides-of-gamestop https://www.bloomberg.com/opinion/articles/2021-01-29/reddit... >Market makers stand ready to buy or sell stock from or to customers; they try to buy for a bit less than they sell at, and pocket the spread. If you go out into the market and say “hey I’ll buy anyone’s stock for $10,” and a really smart hedge fund comes to you and sells you stock for $10, that’s probably bad. You’ve probably made a mistake. The hedge fund is selling you the stock for $10 because it knows it’s worth $8. This is called “adverse selection.” >More subtly, if a really big mutual fund comes to you and sells you stock for $10, that also may be bad. The mutual fund is probably selling lots of stock, because it’s so big; it sells you a little, then sells a little more, then a little more, until it pushes the price down to $8. The mutual fund isn’t necessarily smart, but by virtue of being big and doing big trades, it moves the price; if you are on the other side of its trades, you get run over. This is also a kind of adverse selection: You buy at $10 and are stuck selling at $8. Part of the spread that market makers earn in public markets—the difference between their buying and selling prices—compensates them for adverse selection, the risk of being run over by a counterparty who knows something they don’t. >Market makers, the textbook theory goes, would much rather trade with retail orders. Retail investors generally don’t know much, so if you buy stock from them you’re probably not making a mistake. And retail orders are generally small and uncorrelated: One investor buys a little, another comes along a moment later and sells a little, it’s all pretty random, and you’re not facing an avalanche of steady sell orders that push the price down. Trading with retail is so nice that market makers—wholesalers—will both give retail orders a tighter spread (pay more to buy their stock, charge less to sell stock to them) and pay their broker for the privilege of doing it.
    - briefcomment 6y ago
      That's fine if market makers stick to the rules. What do you make of some of what Citadel has done before? https://www.bloomberg.com/news/articles/2020-07-21/citadel-securities-fined-by-finra-for-trading-ahead-of-clients https://www.bloomberg.com/news/articles/2020-07-21/citadel-s... https://www.sec.gov/news/pressrelease/2017-11.html https://www.sec.gov/news/pressrelease/2017-11.html